Stay calm, don’t panic. File returns as soon a practicable, pay taxes as soon as practicable.
Apply for relief from penalties and interest when delay was unavoidable.
Deadline to file ≠ deadline to pay
Taxpayers have a duty to file tax returns ‘on time’ (before the deadline). However, payment of the taxes due is separate and distinct from filing the tax return.
If a tax return is not filed before the deadline the taxpayer may be charged penalties and interest which can be substantial and which increase rapidly with time.
Different rules apply if the return is filed on time but the amount of tax due is not paid immediately. In these cases, penalties are unlikely, and usually only interest will be charged (and may be waived – see below).
In short, often the best advice is ‘if possible, file the income tax return as soon as possible – before the deadline if possible and if not, as soon thereafter as possible, even if you cannot pay the taxes due now’.
More generally, the best advice for estate trustees about tax deadlines is
‘Stay calm and do not panic. Avoid unnecessary delay, but sometimes delay is unavoidable. Handled properly a late filing will have modest or no negative consequences for the trustee or the estate’.
The deadline for the terminal return (the T1 covering the year of death).
If the taxpayer died in the period January – October, then the tax return for their last year of life (their ‘terminal return’) is due as normal – by April 30 of the following year.
If the taxpayer died in November or December, their terminal return is due ‘6 months after the date of death’, so sometime between May 1 and June 30.
All returns for all prior years remain due by April 30 of the following year.
After death – estate T3 income tax returns
An estate is a trust. A trust must report its income on a T3 tax return, not the usual T1 for a living taxpayer.
The deadline for filing an income tax return for a trust is 90 days after the end of the trust’s fiscal year.
For estates, the fiscal year often starts with one period and then may change to a calendar year.
Usually, for the first 3 years after death the estate will have a fiscal year that begins on the day after death and ends on the anniversary of death, however, the estate can elect a different year end. During this 3 year period the estate is a ‘graduated rate estate’, which means that different levels of income are taxed at different rates (as with personal taxes, the rate of tax rises with rising income).
At the end of the 3 years the estate MUST adopt a calendar year end (December 31). As a result, there is usually a short of ‘stub’ year, from the anniversary of death to December 31, before subsequent years become January 1 – December 31. If the year end of a trust is December 31, then the deadline for filing that income tax return is March 31 of the following year.
The penalties for not filing a return on time can be the greater of $2,500 and 5% of the assets of the trust.
Late filings and waivers of penalties and interest
It is very common to miss one or more deadlines for filing tax returns for deceased taxpayers and their estates. If you are the estate trustee, while it is best to file tax returns on time if you can, if you cannot, do not panic. Late filings and requests for relief from penalties and interest are quite common in estates, and are often for very good reasons.
The best advice for estate trustees is to –
- file income tax returns as soon as practicable,
- pay all income taxes due including all penalties and interest as soon as practicable (which may be some time after the return is filed), and then
- apply to CRA for a waiver or reduction of any penalties and interest if relief is available. Note a separate application must be filed – we can help.
Applying for relief
As a general rule, CRA is more likely to reduce interest than waive than penalties. This is consistent with the advice that it is best to file the return as soon as possible, even if you cannot yet pay the taxes due.
The basic rule is that penalties and interest may be waived if the delay was ‘unavoidable’. While there are no set criteria for what constitutes ‘unavoidable delay’, in the estate context there are quite a few potential delays which are casued by third parties and are entirely outside the control of the estate trustee. For instance, we have successfully requested relief from penalties and interest because of delays caused by Ontario’s painfully slow processing of probate applications, slow bank response times, and Ontario’s very poor response times for delivering death certificates.
Other arguments are possible depending on the specific circumstances – for instance, it may be that it was impossible or imprudent to sell a cottage in winter time and thus the estate could not pay taxes when due.
In each case, a properly prepared, persuasive application for relief is required. We are experienced and we can help.
Avoidable and unavoidable delays – trustee fault?
If the late filing of tax returns and late payment of income taxes was not the fault of the estate trustee, penalties and interest are usually estate expenses and are not charged back to the estate trustee.
Conversely, if the estate trustee was negligent in failing to file or pay taxes, it is possible that the penalties and interest may be ‘charged’ to the trustee, at least in the form of reduced trustee compensation.
This would usually be addressed in the estate accounts and a passing of accounts.
The deadline for the Estate Information Return (the probate tax return in Ontario)
Usually, the estate trustee must pay the full Estate Administration Tax (EAT) when they file an application for probate. Learn more about calculating and paying Estate Administration Tax here.
The deadline for filing the ‘estate information return’ is 180 days after the grant of probate. In other words, tax must be paid upfront, then the return must be filed 180 days after the Certificate of Appointment of Estate Trustee is issued.
The penalties for non-compliance by the estate trustee with the requirement that they file the Estate Information Return can be substantial – fines, and even jail time.
The amount of EAT due is often adjusted when the EIR is filed – sometimes up, sometimes down – depending on how the actual values of estate assets compare to the values used when the probate application was filed. There is no shame in making such an adjustment.
The process to file and pay additional estate administration tax or to request a refund is poorly understood by many lawyers and not easy for lay people to comply with. However, it is relatively straightforward to do it properly and we can help.